Isaac Threatens to Disrupt Drilling, Refining

Even before the winds from Tropical Storm Isaac hit the U.S., its approach is impacting the energy markets.

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The energy industry was responding Friday to a storm track that would send Isaac through the Gulf of Mexico up towards the Gulf Coast between the Florida panhandle and the Mississippi River by Tuesday. \(Read More: Hurricane Iassac Hits Haiti, DR.\)

Drilling companies began to evacuate personnel from threatened rigs, and the refining industry was monitoring the storm’s development. About 40 percent of the nation’s refining capacity is on the Gulf Coast, and operations are vulnerable should storm surges flood low lying coastal areas where refineries are located.

The storm is not well organized, and its path has been difficult to track so traders are tentative heading into the weekend and are hedging against various scenarios.

Anthony Grisanti, President, GRZ Energy commented on his change in strategy, saying he is “cautiously long in crude oil and natural gas.” (Read More: Brent Crude Falls on Oil Reserves Release Report.)

Grisanti said he would not want to be short going into the weekend, as he recalled the way Hurricane Katrina quickly strengthened from a category three to a four, causing massive damage. He acknowledges that though Isaac may not be as powerful as Katrina, the storm’s path “is almost a bulls eye on the production areas off the Louisiana coast."

In New Orleans and Baton Rouge alone, there are 10 refineries with about 2.5 million barrels per day capacity, accounting for 13.9 percent of the total U.S. refining capacity. Other Gulf areas at risk include Mississippi and Alabama, where there are two refineries with 445,000 barrels per day capacity, about for 2.5 percent of the total USA refining capacity. (Read More: How the East Coast Avoided an Oil Crunch.)

In addition to crude refineries, pipelines and drilling rigs could also be exposed to Isaac.

Map of Tropical Storm Isaac's potential path.
Source: Weather Channel
Map of Tropical Storm Isaac's potential path.

“The current track of Isaac is for the Florida panhandle, which is to the east of the producing region. The risk to production is if it veers to the west towards Louisiana, which is where the pipelines and drilling rigs are located,” said Jonathan Nejad of Parity Energy, Inc.

Shell is preparing for evacuations of non-essentials in the eastern and central Gulf of Mexico, the company saying in a statement that “drilling operations have been suspended on some eastern and central assets [but] no production has been impacted.”

And BP is closely monitoring the approaching storm to ensure the safety of its personnel in the Gulf of Mexico. The company says it is also evacuating non-essential personnel from some BP offshore facilities and that it “[has] begun evacuating all workers from [its] Thunder Horse platform in the eastern Gulf and will temporarily suspend oil and natural gas production there.”

Transocean has also evacuated 18 non-essential personnel as a precautionary measure from one of its deepwater 14 rigs in the area of the storm.

The oil service stocks — Halliburton, Baker Hughes, Transocean, and Cameron International — moved lower Friday in anticipation of potential disruption next week but closed mixed. WTI crude traded higher on supply concerns early in the session but finished lower on the day.

Traders are also concerned about natural gas supply. Natural gas was lower in afternoon trading, but futures had moved higher earlier in the day. (Read More: Dennis Gartman: Tapping SPR Cold Drive Oil to New Highs.)

“Fear about Isaac caused a lot of activity in natural gas options this morning,” Nejad said. “Traders were heavily buying calls as insurance against a large upward move in natural gas futures, which Isaac could cause.”

Isaac is currently headed towards the Dominican Republic and Haiti, and it is now expected to strike somewhere between Biloxi, Miss. and Pensacola, Fla. on Tuesday night, according to a report from the National Hurricane Center. Reports suggest that the storm has potential to become at least a Category 1, possibly a Category 2, hurricane. (Read More: GOP Convention Braces for Isaac.)

While there is a high likelihood that refineries in Mississippi and Alabama will shut down, “no one has to decide today, because the storm won’t show up into the gulf until Tuesday,” wrote Andy Lipow, President of Lipow Associates, in a note this morning. “Refineries will make a decision Sunday, 48 hours before expected landfall.”

—By CNBC's Jackie DeAngelis

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